Selected information from the separate and consolidated balance sheets and income

statements of Pare, Inc. and its subsidiary, Shel Co., as of December 31, Year 1, and
for the year then ended is as follows:
Pare Shel Consolidated
Balance sheet accounts
Accounts receivable $ $52,000 $ $38,000 $ $78,000
Inventory 60,000 50,000 104,000
Income statement accounts
Revenues 400,000 280,000 616,000
Cost of goods sold 300,000 220,000 462,000
Gross profit $ 100,000 $ 60,000 $ 154,000
Additional information: During Year 1, Pare sold goods to Shel at the same markup on
cost that Pare uses for all sales.
In Pare's consolidating worksheet, what amount of unrealized intercompany profit was
eliminated?
a. $64,000
b. $58,000
c. $6,000
d. $12,000
c
Sun, Inc. is a wholly-owned subsidiary of Patton, Inc. On June 1, Year 1, Patton
declared and paid a $1 per share cash dividend to stockholders of record on May 15,
Year 1. On May 1, Year 1, Sun bought 10,000 shares of Patton's common stock for
$700,000 on the open market, when the book value per share was $30. What amount of
gain should Patton report from this transaction in its consolidated income statement for
the year ended December 31, Year 1?
a. $0
b. $390,000
c. $410,000
d. $400,000
a
In its financial statements, Pare, Inc. accounts for its 15% ownership of Sabe Co. as an
available-for-sale security. At December 31, Year 1, Pare has a receivable from Sabe.
How should the receivable be reported in Pare's December 31, Year 1, balance sheet?
a. The total receivable should be offset against Sabe's payable to Pare, without
separate disclosure.
b. The total receivable should be included as part of the investment in Sabe, without
separate disclosure.
c. The total receivable should be reported separately.
d. Eighty-five percent of the receivable should be reported separately, with the balance
offset against Sabe's payable to Pare.
c
Perez, Inc. owns 80% of Senior, Inc. During Year 1, Perez sold goods with a 40% gross
profit to Senior. Senior sold all of these goods in Year 1. For Year 1 consolidated
financial statements, how should the summation of Perez and Senior's income
statement items be adjusted?
a. Sales and cost of goods sold should be reduced by the intercompany sales.
b. No adjustment is necessary.
c. Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
d. Net income should be reduced by 80% of the gross profit on intercompany sales.
a
Port, Inc. owns 100% of Salem Inc. On January 1, Year 1, Port sold Salem delivery
equipment at a gain. Port had owned the equipment for two years and used a five-year
straight-line depreciation rate with no residual value. Salem is using a three-year
straight-line depreciation rate with no residual value for the equipment. In the
consolidated income statement, Salem's recorded depreciation expense on the
equipment for Year 1 will be decreased by:
a. 33 1/3% of the gain on sale.
b. 100% of the gain on sale.
c. 20% of the gain on sale.
d. 50% of the gain on sale.
a
Clark Co. had the following transactions with affiliated parties during Year 1:
•Sales of $60,000 to Dean, Inc., with $20,000 gross profit. Dean had $15,000 of
inventory on hand at year-end. Clark owns a 15% interest in Dean and does not exert
significant influence.
•Purchases of raw materials totaling $240,000 from Kent Corp., a wholly-owned
subsidiary. Kent's gross profit on the sale was $48,000. Clark had $60,000 of this
inventory remaining on December 31, Year 1.
Before eliminating entries, Clark had consolidated current assets of $320,000. What
amount should Clark report in its December 31, Year 1, consolidated balance sheet for
current assets?
a. $308,000
b. $303,000
c. $320,000
d. $317,000
a
The following information pertains to shipments of merchandise from Home Office to
Branch during Year 1:
Home Office's cost of merchandise $ 160,000
Intracompany billing 200,000
Sales by Branch 250,000
Unsold merchandise at Branch on December 31, Year 1 20,000
In the combined income statement of Home Office and Branch for the year ended
December 31, Year 1, what amount of the above transactions should be included in
sales?
a. $180,000
b. $250,000
c. $200,000
d. $230,000
b
Parker Corp. owns 80% of Smith Inc.'s common stock. During Year 1, Parker sold Smith
$250,000 of inventory on the same terms as sales made to third parties. Smith sold all
of the inventory purchased from Parker in Year 1. The following information pertains to
Smith and Parker's sales for Year 1:
Parker Smith
Sales $ 1,000,000 $ 700,000
Cost of sales 400,000 350,000
$ 600,000 $ 350,000
What amount should Parker report as cost of sales in its Year 1 consolidated income
statement?
a. $680,000
b. $500,000
c. $430,000
d. $750,000
b
In its financial statements, Pulham Corp. uses the equity method of accounting for its
30% ownership of Angles Corp. At December 31, Year 1, Pulham has a receivable from
Angles. How should the receivable be reported in Pulham's Year 1 financial
statements?
a. The total receivable should be included as part of the investment in Angles, without
separate disclosure.
b. Seventy percent of the receivable should be separately reported, with the balance
eliminated.
c. The total receivable should be disclosed separately.
d. The receivable should be eliminated.
c
Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp. Twill
purchases merchandise inventory from Webb at 140% of Webb's cost. During Year 1,
merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this
merchandise to unrelated customers for $81,200 during Year 1. In preparing combined
financial statements for Year 1, Nolan's bookkeeper disregarded the common
ownership of Twill and Webb.
By what amount was unadjusted revenue overstated in the combined income statement
for Year 1?
a. $40,000
b. $81,200
c. $56,000
d. $16,000
c
P Co. purchased term bonds at a premium on the open market. These bonds
represented 20 percent of the outstanding class of bonds issued at a discount by S Co.,
P's wholly owned subsidiary. P intends to hold the bonds until maturity. In a
consolidated balance sheet, the difference between the bond carrying amounts in the
two companies would be:
a. Included as a decrease to retained earnings.